Last Friday, the UK and the European Union finally presented a 15-page exit deal, ending six months of tedious negotiations. According to Julius Baer’s analysts “it was the breakthrough UK Prime Minister May needed so badly”, but looking at the details, “the deal contains some serious political stumbling blocks.”
The Ireland border issue is intended to be solved with a soft border, which is not necessarily in line with the preferences of May’s coalition allies of the DUP (Democratic Unionist Party) and the special status of Northern Ireland bears the potential to awaken desires for similar treatment in other regions (Scotland, Wales, London City).
Regarding financial obligations, the UK has agreed to pay most of the EU’s demands. Experts at the house say that although it is “nearly impossible” to calculate the exact sum, expectations are set around EUR 40bn-45 bn.
Payments could end up being controversial, as certain items, such as pensions for EU officials, will mean payments for decades.With May rather giving in to most EU demands, support from the hard Brexit liners could deteriorate further.
The last item, citizens’ rights of one million British abroad and 3.5 million EU citizens living in the UK, seems least polemic. However, the UK courts’ acceptance of European Court of Justice rules is a compromise which again goes further than what the UK initially seeked for.
Markets took the deal with reservation, as shown by only minor appreciation of the pound sterling to levels around EUR/GBP 0.87. While the worst downside risk, a no deal at all scenario, could be removed, the parties will move on to the second but more difficult part of the negotiations, namely a trade deal.
The exit deal will not lead to sustained pound relief, as Julius Baer continue to expect the UK to lose its EU single market passport. Hence, they maintain our long-term bearish view on the pound with a 12-month target of EUR/GBP 0.92.